Delayed Annuities: Definition, Operation, Varieties, and Instances
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Summary:
A delayed annuity, also known as a deferred annuity, offers a reliable stream of cash payments to an annuitant until death, with the flexibility to defer payouts. This article explores the workings of delayed annuities, including types, considerations, and examples.
What is a delayed annuity?
A delayed annuity, also referred to as a deferred annuity, differs from an immediate annuity in that the first payment is not received immediately. Instead, it offers a guaranteed stream of cash payments to an annuitant until death. Upon the annuitant’s death, the cash benefit can be transferred to a beneficiary or estate, based on the buyer’s chosen options.
How a delayed annuity works
During the accumulation phase, a delayed annuity grows, accumulating funds until it reaches the distribution phase, where benefits are paid out. These annuities can be single-premium or flexible-premium, allowing additional payments during the accumulation phase. Withdrawals can be made as needed, offering flexibility and control over the funds.
Types of delayed annuities
Fixed delayed annuity
A fixed delayed annuity functions similarly to a certificate of deposit, with tax on interest deferred until withdrawal. The annuity writer specifies a guaranteed interest rate for payments.
Variable delayed annuity
A variable delayed annuity operates like buying mutual funds, with returns dependent on sub-account performance. These annuities can be riskier and more expensive.
Longevity annuity
A longevity annuity resembles a traditional life annuity but typically begins later than retirement age, acting as longevity insurance when other assets are spent down.
Special considerations
With the passage of the SECURE Act in 2019, new rules affect retirement accounts holding annuities. Non-spousal beneficiaries must withdraw funds within ten years of the owner’s death. However, annuities within employer-sponsored plans can be transferred to a new plan if changing jobs.
Example of a delayed annuity
If an annuity is funded with a premium payment and offers five yearly payments deferred for ten years, it is classified as a delayed annuity. Determining the net present value requires discounting payments to the present.
Frequently asked questions
Are delayed annuities tax-deferred?
Yes, like most annuities, delayed annuities offer tax-deferred growth during the accumulation phase.
Can I add more funds to a delayed annuity after the initial purchase?
Yes, flexible-premium deferred annuities allow additional contributions during the accumulation phase.
What happens if I pass away before receiving payments from a delayed annuity?
Depending on the contract terms, beneficiaries can receive the remaining funds or a death benefit payout.
Key takeaways
- A delayed annuity offers flexibility in deferring payouts until a later date.
- Fixed and variable delayed annuities provide different risk and return profiles.
- The SECURE Act introduced new rules affecting annuities within retirement accounts.
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